Every once in a while I receive an email that seems to sum up a recurring question, and it inspires one of my columns. This was one of those weeks.

John from Wilmington, N.C., sent a message that really caught my attention, for several reasons. First, I might have been partially to blame (or to credit) for his transfer from the Civil Service Retirement System to the Federal Employees Retirement System. In 1987, both John and I worked at the FBI, where I was a retirement counselor. A big part of my job back then was to learn as much as I could about the newly created FERS in order to help make a presentation to employees covered under CSRS so they could decide whether to switch to the new system.

I still remember being in a big auditorium wondering how I was going to do a good job with the presentation when I really wanted to be home in bed. John might have been in the audience that day. If he did hear our presentation, he must have thought that FERS would provide the portability that he needed since he wasn’t planning to make government service his career. He made the irrevocable switch from CSRS to FERS. But now it seems he’s having second thoughts about the choice. Here’s his message:

I am a support employee with the FBI and have 30 years in. Unfortunately, I switched from CSRS to FERS with just five years (1982-87) of federal service. I was on the night shift, could not get off and was going to leave the government around ‘87. Here I am 30 years later still working for the FBI. I have five years left before I am eligible to retire at age 56. I slammed most of my pay increases into the Thrift Savings Plan. With 1 percent of my salary (high three) it looks like I will get about $2,000 a month from my pension with the spousal annuity reduction. Hopefully, I will have close to half a million in Thrift plus maybe $900 [a month] from the Social Security supplement. My question: If I retire at 56, will I be penalized for taking the FERS annuity instead of waiting until I’m 59 ½? I can't live on the pension. I have a 1995 Ford Ranger, have not lived above my means, and now I have to pay for those people who made so many bad decisions. I worked my way up from a Grade 3 to now a Grade 11.

I remember that one of the things we pointed out about FERS back in 1987 was that if you were not going to stay in government service, then it would be more like a retirement plan you would have in the private sector. With Social Security coverage and the TSP, FERS is much more portable. We also showed that if you did plan to stay in federal service, then you must understand FERS has three separate components that must all provide income to replace the single pension benefit of CSRS. That means you have to understand how Social Security works, the importance of retirement savings and how to live with a smaller government pension.

So let’s see how John did. By the time he retires at 56, he will have about 35 years of federal service and a high-three average salary of about $70,000 (maybe more if he receives any more pay increases). He’ll have a TSP balance of about $500,000. (Wow!) Let’s assume that if John didn’t switch to FERS, he would have less than this in the TSP because he would not have received government contributions and wouldn’t have been compelled to save as much since his CSRS benefit didn’t require TSP participation to provide a full retirement. Let’s say if he didn’t switch, his TSP account might be worth about $175,000 instead of his projected balance of $500,000.

CSRS

FERS

Government retirement benefit (John receives credit under CSRS for his first five years of service before his transfer to FERS)

66.25% of $70,000 = $46,375

37.5% of $70,000 = $26,250

Reduction for maximum survivor's annuity

$46,375 - $4,367
= $42,008

$26,250 - $2,625 = $23,625

Thrift Savings Plan

$175,000

$500,000

Social Security John was exempt from Social Security under CSRS. Under FERS, he is entitled to a supplement at 56 and then Social Security retirement benefits at 62. A ballpark figure for the FERS supplement is about $35 a month for every year of civilian service under FERS.

$0

$12,000

Without the TSP, John's retirement at age 56

$42,008

$35,625

How much does he need from his TSP to make up the difference?

$6,383

Total retirement income

$42,008

$42,008

It looks as though John did all right by switching to FERS, because he should easily be able to withdraw enough from his TSP each year to make up the difference between what his CSRS benefit would have been and what his FERS benefit will be. In fact, it looks as though he might have come out ahead and will be rewarded in retirement for the sacrifices he made to save for retirement.

Here are a few other things for John to remember:

He will not receive any cost-of-living adjustments on his FERS benefit between age 56 and 62. If there is a 3 percent COLA every year for CSRS retirees, then the difference between the two systems will be around $8,000 a year more than it is at 56. He’ll be OK if he doesn’t withdraw too much from his TSP account in the early years. He has a large enough TSP balance that he can make up for the COLA loss during those years.

Once John turns 62, the FERS supplement will end and his Social Security benefit will be computed. The Social Security benefit could be more than the FERS supplement.

If John decides to work after he retires at 56, he could have the supplement reduced or eliminated. In 2012, the supplement is subject to an earnings limit of $14,640. For every $2 of earned income above this limit, the supplement is reduced by $1. If that happens, John could lose the supplement due to excess earnings. The upside is this will increase his future Social Security benefit by adding more wages to his Social Security record that could replace lower wages when John was working as a GS-3.

If John dies before his spouse, she will inherit the balance of his TSP account and will have the same withdrawal options as he has. She also will be entitled to receive a lifetime survivor’s annuity equal to 50 percent of $26,250. She will receive a widow’s benefit from Social Security (or a supplement if John dies before she turns 60) that would provide replacement of the Social Security benefit. She will be entitled to either her own Social Security retirement or the one that John has earned for her, whichever is larger.

By the way, to answer the direct question John asked in his email, there are no penalties to his FERS benefit for retiring at 56 with 35 years of service. He is able to receive unreduced benefits and withdrawals from his TSP account without penalty. John is planning to retire at the FERS minimum retirement age (55-57, depending on year of birth) with more than 30 years of service. That qualifies him for unreduced FERS retirement benefits. Here are the FERS eligibility rules.

In addition, when employees separate from federal service in the year they reach age 55 or later, they are exempt from the early withdrawal tax penalty for withdrawals from the TSP. See this TSP publication for more details.

I know some of you will be convinced my numbers are wrong, or somehow I’ve been deceptive in making FERS look as good as CSRS. If you want to debate my logic, I am ready to take up that challenge. My concern is not for federal employees like John who understood how FERS works, even though he is still skeptical. My real concern is for those who are covered under FERS and haven’t understood the relationship between the three components of the system and how they must work together.

I also worry that if Congress changes FERS to eliminate the supplement, further modify the Social Security system or remove the FERS basic retirement benefit altogether, then employees will have to save more than John did to be able to afford a comfortable retirement. For them, the future may not look as bright. It pays to stay informed and keep alert to the changes to your benefits and have a good understanding of how they work to provide for your financial security. One thing you can be sure of is that you are responsible for your retirement security more now than ever before.

Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Federal News Radio on Mondays at 10 a.m. ET on WFED AM 1500 in the Washington-metro area. Archived shows are available on NITPInc.com.

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